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Bonus and Gratuity Act

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Payment of Gratuity Act, 1972 Gratuity is a lump sum payment to employee when he retires or leaves service. It is basically a retirement benefit to an employee so that he can live life comfortably after retirement. However, under Gratuity Act, gratuity is payable even to an employee who resigns after completing at least 5 years of service. In DTC Retired Employees v. Delhi Transport Corporation 2001(4) SCALE 30 = 2001 AIR SCW 2005, it was observed that gratuity is essentially a retiring benefit
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  Payment of Gratuity Act, 1972 Gratuity is a lump sum payment to employee when he retires or leaves service. It is basically a retirementbenefit to an employee so that he can live life comfortably after retirement. However, under Gratuity Act,gratuity is payable even to an employee who resigns after completing at least 5 years of service.In DTC Retired Employees v. Delhi Transport Corporation 2001(4) SCALE 30 = 2001 AIR SCW 2005, itwas observed that gratuity is essentially a retiring benefit which as per Statute has been made applicableon voluntary resignation as well. Gratuity is reward for good, efficient and faithful service rendered for aconsiderable period. ACT PROVIDES FOR MINIMUM GRATUITY ONLY ± The Gratuity Act provides only for minimumgratuity payable. If employee has right to receive higher gratuity under a contract or under an award, theemployee is entitled to get higher gratuity. [Section 4(5)]. Employers liable under the scheme - The Act applies to every factory, mine, plantation, port, andrailway company. It also applies to every shop and establishment where 10 or more persons areemployed or were employed on any day in preceding 12 months. [Section1(3)]. Since the Act is alsoapplicable to all shops and establishments, it will apply to motor transport undertakings, clubs, chambersof commerce and associations, local bodies, solicitor¶s offices etc. , if they are employing 10 or morepersons. Employees eligible for gratuity ± ¶Employee¶ means any person (other than apprentice) employed onwages in any establishment, factory, mine, oilfield, plantation, port, railway company or shop, to do anyskilled, semi-skilled or unskilled, manual, supervisory, technical or clerical work, whether terms of suchemployment are express or implied, and whether such person is employed in a managerial or administrative capacity. However, it does not include any Central/State Government employee. [Section2(e)]. Thus, the Act is applicable to all employees - workers as well as persons employed in administrativeand managerial capacity.Gratuity is payable to a person on (a) resignation (b) termination on account of death or disablement dueto accident or disease (c) retirement (d) death. Normally, gratuity is payable only after an employeecompletes five years of continuous service. In case of death and disablement, the condition of minimum 5years¶ service is not applicable. [Section 4(1)].The Act is applicable to all employees, irrespective of the salary.  Amount of gratuity payable - Gratuity is payable @ 15 days wages for every year of completed service.In the last year of service, if the employee has completed more than 6 months, it will be treated as fullyear for purpose of gratuity. - - In case of seasonal establishment, gratuity is payable @ 7 days wages for each season. [Section 4(2)].Wages shall consist of basic plus D.A, as per last drawn salary. However, allowances like bonus,commission, HRA, overtime etc. are not to be considered for calculations. [Section 2(s)].In case of employees paid on monthly wages basis, per day wages should be calculated by dividingmonthly salary by 26 days to arrive at daily wages e.g. if last drawn salary of a person (basic plus DA) isRs. 2,600 per month, his salary per day will be Rs. 100 (2,600 divided by 100). Thus, the employee isentitled to get Rs. 1,500 [15 days multiplied by Rs. 100 daily salary] for every year of completed service. If he has completed 30 years of service, he is entitled to get gratuity of Rs. 45,000 (Rs. 1,500 multiplied by30). Maximum gratuity payable under the Act is Rs. 3.50 lakhs (the ceiling was Rs. 1,00,000 which wasincreased to 2.50 lakhs on 24.9.97 by an ordinance which was later increased to Rs 3.50 lakhs whileconverting the ordinance into Act]. MAXIMUM GRATUITY PAYABLE ± Maximum gratuity payable is Rs 4 lakhs. [Section 4(3)]. [Of course,employer can pay more. Employee has also right to get more if obtainable under an award or contractwith employer, as made clear in Section 4(5)].INCOME-TAX EXEMPTION - Gratuity received upto Rs. 3.50 lakhs is exempt from Income Tax. Gratuitypaid above that limit is taxable. [Section 10(10) of Income Tax Act]. - - However, employee can claimrelief u/s 89 in respect of the excess amount.No Compulsory insurance of gratuity liability ± Section 4A provides that every employer must obtaininsurance of his gratuity liability with LIC or any other insurer. However, Government companies need notobtain such insurance. If an employee is already member of gratuity fund established by an employer, hehas option to continue that arrangement. If an employer employing more than 500 persons establishes anapproved gratuity fund, he need not obtain insurance for gratuity liability. - - However, this Section has notyet been brought into force. Hence, presently, such compulsory insurance is not necessary.Gratuity cannot be attached - Gratuity payable cannot be attached in execution of any decree or order of any civil, revenue or criminal court, as per Section 13 of the Act. Payment of Bonus Act, 1965 The term ³bonus´ has not been defined in the Payment of Bonus Act, 1965. Webster¶s InternationalDictionary, defines bonus as ³something given in addition to what is ordinarily received by or strictly due  to the recipient´. The Oxford Concise Dictionary defines it as ³something to the good into the bargain (andas an example) gratuity to workmen beyond their wages´. L.A.T Formula regarding payment of bonus:  A dispute relating to payment of bonus by the Cotton Mills of Bombay was decided by the IndustrialCourt, Bombay. An appeal against the award of the Industrial Court was considered by the Full Bench of the then Labour Appellate Tribunal (Mill Owners¶ Association, Bombay v. Rashtriya Mill Mazdur Sangh,Bombay, 1959 II LLJ 1247).In its decision, the LAT laid down the principles involved in the grant of bonus to workers. Theseprinciples are known as the LAT Formula. According to the formula, the following prior charges were to bededucted from gross profits:1. Provision for depreciation;2. Reserve for rehabilitation;3. Return of 6 per cent on the paid up capital; and4. Return on the working capital at a lower rate than the return on paid-up capital.The balance, if any, was called ³available surplus´ and the workmen were to be awarded a reasonableshare out of it by way of bonus for the year.Bonus is really a reward for good work or share of profit of the unit where the employee is working. Oftenthere were disputes between employer and employees about bonus to be paid. It was thought that alegislation will solve the problem and hence Bonus Act was passed. Unfortunately, in the process, bonushas become almost as deferred wages due to provision of payment of minimum 8.33% and maximum20% bonus. Bonus Act has not in any way reduced the disputes.The Act is applicable to (a) any factory employing 10 or more persons where any processing is carriedout with aid of power (b) Other establishments (established for purpose of profit) employing 20 or morepersons. Minimum bonus payable is 8.33% and maximum is 20%. Bonus is payable annually within 8months from close of accounting year. Bonus is payable to all employees whose salary or wages do notexceed Rs 3,500 per month provided they have worked for at least 30 days in the accounting year.However, for calculation of bonus, maximum salary of Rs 2,500 is considered.Once the Act is applicable, it continues to apply even if number of employees fall below 20. The Act isapplicable to Government companies and corporations owned by Government which produces goods or renders services in competition with private sector. However, the Act is not applicable to Governmentemployees, the employees of Municipal Corporation or Municipality, railway employees, university and  employees of educational institutions, public sector insurance employees, employees of RBI and publicsector financial institutions, charitable hospitals, social welfare organisations and defense employees.The Act does not apply to any institution established not for purposes of profit. Establishments to which the Act is applicable - The Act applies to² (a) every factory; and (b) everyother establishment in which twenty or more persons are employed on any day during an accountingyear. [section 1(3)]. Act not to apply to certain classes of employees :Section 32 of the Act provides that the Act shall not apply to the following classes of employees:1. Employees employed by any insurer carrying on general insurance business and theemployees employed by the Life Insurance Corporation of India;2. Seamen as defined in clause (42) of Section 3 of the Merchant Shipping Act, 1958;3. Employees registered or listed under any scheme made under the Dock Workers (Regulationof Employment) Act, 1948 and employed by registered or listed employers;4. Employees employed by an establishment engaged in any industry called on by or under theauthority of any department of Central Government or a State Government or a local authority;5. Employees employed by:a) The Indian Red Cross Society or any other institution of a like nature including itsbranches;b) Universities and other educational institutions;c) Institutions (including hospitals, chambers of commerce and social welfareinstitutions) established not for the purpose of profit;6. Employees employed through contractors on building operations;7. Employees employed by the Reserve Bank of India;8. Employees employed by:a) The Industrial Finance Corporation of India;b) Any Financial Corporation established under Section 3, or any Joint FinancialCorporation established under Section 3A of the State Financial Corporations Act, 1961;c) The Deposit Insurance Corporation;d) The National Bank for Agriculture and Rural Development;e) The Unit Trust of India;f) The Industrial Development Bank of India;fa) The Small Industries Development Bank of India established under Section 3 of the SmallIndustries Development Bank of India Act, 1989;

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